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Matthew Hutton, Presenter of the ‘Private Client Monthly Tax Update’ Webinars, highlights a debate among tax professionals on whether an important Inheritance Tax exemption applies in certain circumstances.

Context: the Question

‘I had always understood that regular withdrawals from investment bonds do not count as income for the purposes of the 'normal expenditure' exemption, but at a recent STEP conference I am sure I heard Emma Chamberlain say that they do.

The point does not appear to be addressed in the HMRC IHT manual, and I would be interested to know if anyone has had experience of claiming the exemption in a case where the point was relevant.’

(Trusts Discussion Forum, posting by Diana Smart of Taylor & Emmet LLP on 19.11.2010)

Alternative Responses

Withdrawals from Investment Bonds – Whether Regular or Not – Are Not Income

’IHTM 14250 states that ‘You should consider income as net income after payment of Income Tax. Income is not defined but should be determined in accordance with normal accountancy rules; it does not necessarily coincide with income for Income Tax purposes.

Under "normal accountancy rules" withdrawals from investment bonds are capital rather than income in nature - regardless of the frequency of such withdrawals.

I'm not aware of HMRC ever having taken an alternative view and agree with Diana Smart's understanding of the position.’

(Trusts Discussion Forum, posting by Gerry Brown of Prudential on 24.11.2010)

HMRC’s Favourable Practice at Odds with the Law?

‘Emma Chamberlain has been saying this for years. She made a similar statement at a conference I attended perhaps five or six years ago. When I queried it with her, she agreed with me that regular withdrawals from investment bonds are technically withdrawals of capital and, hence, if they are given away, they cannot be claimed under the normal expenditure exemption. However, Emma had seen claims for the exemption agreed by the Inland Revenue (as they were called at that time) in such circumstances. She suggested that this was the point she was trying to convey.

It is not a position that I would be prepared to rely on, particularly in the current climate where HMRC are clearly looking at maximising tax revenue and minimising the perceived tax gap.’

(Trusts Discussion Forum, posting by Paul Thompson of Canada Life on 24.11.2010)

‘I recall that this point has been discussed on the forum a couple of times before, about five years ago and a year before that. The same points were debated and the majority view was that the bond withdrawals are capital for the purposes of the normal expenditure exemption. This is not my experience.

At a CIOT presentation in 2005, shortly before he retired from the CTO, Peter Twiddy expressed the CTO view that withdrawals from single premium insurance bonds are regarded as income for the purposes of IHTA 1984 s 21 provided that the capital of the bond is maintained. I was surprised at this and wrote to him for clarification. He replied, in writing, whilst still at the CTO - an extract from his letter is reproduced below:

’I recall that for many years after the introduction of capital transfer tax we did hold the view that the normal 5% per annum withdrawals from such a bond would be regarded as capital receipts for the purposes of IHT 1984 s 21.

This hard and fast assumption was reconsidered a while ago, and our position is that where there are regular withdrawals of 5% per annum then, so long as the capital of the bond is maintained, the presumption must be that the withdrawals are income’.’

(Trusts Discussion Forum, posting by Julian Smith of Princecroft Willis LLP on 24.11.2010)

About Hutton Webinars

Continual difficulties and hassles of travel to a lecture/conference venue and costs constraints have led to the increasing popularity of the Webinar as a forum for delivering information in a cost-efficient and effective way. This is a facility which Matthew is now offering to his clients. All you need to attend is a PC or a Mac with Internet access.

Starting on Wednesday 19 January 2011, Matthew will be running a monthly 75-minute Private Client Tax Update webinar at lunchtime (1.00 - 2.15pm) to cover all that you need to know to advise your clients more effectively, in terms of Decided Cases, Legislative Changes, HMRC Practice and Tax Planning Tips and Traps. The attached flyer and registration form gives the prices and further details. Note that, for registrations received by Matthew before 1 January 2011, there is a 10% discount on all the prices.

For further information, see: Private Client Monthly Tax Update 2011 Webinars

For a registration form: Private Client Monthly Tax Update 2011 Webinars Registration Form